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driving concerns

We’re shopping for a new SUV because our previous one was written off after someone slammed into it while it was parked on the street. Miraculously, we found a dealer with the one we wanted in stock, but when we went to buy, we were told that we would have to finance through the dealer and we would have to sign a letter saying our credit card would be charged $1,000 if we paid off the loan early. We’d planned to use the [insurance] settlement and our line of credit – which has a much lower interest rate than they’re charging – to pay cash for the vehicle. Are dealers allowed to do this? – Sam, Calgary

There is no rule barring dealers from forcing you to finance your car through them – but they can’t punish you for paying off the loan early, Alberta’s dealer regulator said.

“Automotive businesses can decide how they accept payment – just as some retailers will not accept certain credit cards and some won’t accept cash,” said Laura Meador, spokeswoman for the Alberta Motor Vehicle Industry Council (AMVIC), which licenses and regulates dealers in Alberta. “[But] if an automotive business tells you that you must keep the loan for at least six months, this is not true and would represent an unfair practice that [we] could investigate.”

So, if you don’t want to be forced to finance your car through the dealer, you could either walk away from the deal before you sign it – or you could accept their financing and then pay it off right away after you get financing through a line of credit or your own bank.

Under Section 68 of Alberta’s Consumer Protection Act, consumers have the right to pay off any non-mortgage loan in full any time after signing or to make an extra payment over and above any scheduled payments without penalty, Meador said.

That rule doesn’t change if you sign a contract at the dealership saying you’ll pay the penalty, she said. “Consumers cannot waive or release their rights, benefits or protections under the [Act], even if a contract says they are waiving their rights.”

While the rules vary by province, no jurisdictions explicitly ban forced financing, said George Iny, president of the Automobile Protection Association, an automotive consumer advocacy group with offices in Toronto and Montreal.

Two other provinces – Ontario and British Columbia – have dealer regulators. The Vehicle Sales Authority of British Columbia didn’t immediately answer questions about forced financing. Ontario’s Motor Vehicle Industry Council (OMVIC) wouldn’t say whether dealers were allowed to charge you a penalty if you paid off their financing early.

OMVIC did say in a statement that any “unprofessional, dishonest or other improper behaviour” that violates its code of ethics could “result in enforcement action.”

Extra money for dealers

So why do dealers want to force you to finance through them? Simple: They get a commission from the banks and finance companies, the APA’s Iny said.

“The dealer can get $1,000 and up [in commission], depending on the price of the vehicle,” Iny said.

But if the buyer pays off the loan early – typically within the first six months – the bank will ask the dealer for the commission back, Iny said.

Because the dealer doesn’t want to lose that commission, the dealer will either ask you for a postdated cheque or they’ll demand you preapprove a charge on your credit card that offsets the commission they’d have to return, Iny said.

“If you pay off the financing early, then they’ll cash the cheque or run the charge through,” Iny said.

While you can back out of any deal before you sign the purchase agreement, some dealerships have sprung the forced financing on customers when the vehicle is delivered – sometimes months after they’ve signed the deal.

So what is the recourse? You could file a small-claims lawsuit for the penalty they charged, Iny said, adding that he is not aware of any cases where this has happened.

We asked several of the big banks whether they were aware dealers are forcing buyers to finance vehicles, but most didn’t immediately respond.

Royal Bank of Canada declined to answer questions. TD Canada Trust didn’t answer the questions directly. In an email statement, it said: “[dealership] customers have the ability to choose the financing option that works best for them. TD Auto Finance loans are open and can be paid off at any time without penalty.”

But Iny said banks should be aware of what dealers are doing.

“They must know that people are paying off their loans six months after they get them,” he said. “That is not something you usually do if you’re [willingly] financing a car for 84 months.”

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